Solo 401(k) vs. SEP IRA: Which Is Better for the Self-Employed?

If you are self-employed — as a freelancer, sole proprietor, independent contractor, or single-member LLC owner — you have access to two powerful retirement account options that most W-2 employees do not: the Solo 401(k) and the SEP IRA. Both offer significantly higher contribution limits than an individual IRA, but they work differently and favor different income situations.

The choice between them can mean tens of thousands of dollars in additional tax-deferred savings per year — particularly at lower income levels where the Solo 401(k) has a decisive structural advantage.

2025 Contribution Limits

Both accounts share the same maximum combined contribution limit: $70,000 in 2025 (plus a $7,500 catch-up for those 50 and older in the Solo 401(k)).

The difference is how you get there.

SEP IRA: Contributions are limited to 25% of your net self-employment income (after the self-employment tax deduction). There is no separate "employee" contribution — the entire contribution comes from the employer side.

Solo 401(k): Has two layers. The "employee" side allows you to contribute up to $23,500 as an elective deferral (the standard 401(k) limit). On top of that, the "employer" side adds up to 25% of your net SE income (same as the SEP). The combined total cannot exceed $70,000.

Where the Solo 401(k) Wins: Low-to-Moderate Income

At lower income levels, the employee deferral in the Solo 401(k) is the difference between a meaningful retirement contribution and a very small one.

Example: Net self-employment income of $60,000. SEP IRA maximum contribution: 25% × $56,732 (adjusted for SE tax deduction) ≈ $14,183. Solo 401(k) maximum: $23,500 employee deferral + ~$14,183 employer contribution = $37,683.

That is a $23,500 difference in tax-deferred savings at the same income level. For someone in the 22–24% bracket, that means approximately $5,000–$5,600 more in current-year tax savings — just from choosing the right account.

Where the SEP IRA Wins: Simplicity and Administration

The SEP IRA has almost no administrative burden: no annual filing with the IRS, no plan documents to maintain, and no compliance testing. You can open a SEP IRA at most brokerages in minutes and make contributions up to the tax filing deadline (including extensions).

The Solo 401(k) requires more setup: establishing a plan document, adopting a plan by December 31 of the year you want to contribute, and filing IRS Form 5500-EZ once your plan assets exceed $250,000. It is not particularly burdensome, but it is more than a SEP IRA requires.

Roth Option

The Solo 401(k) can offer a Roth contribution option, allowing you to designate part or all of your employee deferral as Roth (after-tax). There is no income limit on Roth Solo 401(k) contributions, unlike direct Roth IRA contributions.

The SEP IRA has no Roth option. All contributions are pre-tax.

If You Have Employees

Neither account is well-suited for businesses with non-owner employees. The Solo 401(k) is only available to self-employed individuals with no full-time W-2 employees other than a spouse. A SEP IRA requires you to cover all eligible employees at the same percentage of compensation you contribute for yourself — which can become very expensive at scale.

If your business is growing and you anticipate hiring, planning your retirement account structure in advance is important. Work with a CPA or financial advisor to model the transition before you hire.

Which Should You Choose?

Choose the Solo 401(k) if: your net self-employment income is under $200,000 and you want to maximize contributions; you want the option for Roth contributions; or you want the ability to take a loan from your retirement plan.

Choose the SEP IRA if: your net income is high enough that the 25% employer-only contribution reaches the $70,000 cap anyway (roughly $280,000+); you strongly prefer simplicity and want the latest possible contribution deadline; or you are already established and do not want to set up a new plan mid-year.